ime and materials contracts, or “T&M” contracts, are favored among contractors for several reasons. First, labor and materials are billed as those costs are incurred, meaning contractors face less risk of non-payment. Second, this structure provides more predictable profits, since overhead and profit are built into the contract at a set rate. And lastly, this structure can help manage client expectations, particularly when the scope of a project is unknown or subject to variables that make accurate bidding and estimating a challenge.

Are there any downsides? As a recent Alaska Supreme Court case highlighted, yes—if contractors don’t carefully define expectations and labor rate pricing upfront. In First Evangelical Covenant Church of Anchorage Alaska v. Michael L. Foster & Associates, the client, First Evangelical Covenant Church, hired Michael L. Foster & Associates to rebuild the church after it was destroyed in a fire. The firm served as general contractor for the project, entered a T&M contract with the client, and attached a schedule of its labor rates to the contract.

After the project was completed, all parties agreed that the contractor had completed the work satisfactorily—even going above and beyond to perform the work in a way that minimized interference with the church’s operations.

However, after receiving the contractor’s invoices, the client—and its insurance adjuster, who was funding the renovation—objected to the total cost, arguing that the contractor’s labor rates were unreasonable. The reason? The contractor charged labor rates based on each employee’s titled position, rather than the type of work the employee actually performed on the project.

The client reasoned that labor should be billed based on the work performed, not the job title or qualifications of the employee performing the work. For example, cleaning should have been billed at a cleaning rate, project management should have been billed at a project management rate, and engineering should have been billed at a professional engineering rate.

This dispute over the reasonableness of the contractor’s labor rates left the contractor with a six-figure shortfall and the contractor ultimately sued the church—and the church’s insurance company—to recover the unpaid balance.

In court, it didn’t matter that the contractor had attached a schedule of its labor rates to the contract and used those rates when billing labor. And it didn’t matter that the church had been satisfied with the contractor’s work. When a contractor brings a lawsuit for unpaid billings on a T&M contract, the contractor has the burden of proving that the disputed billings were for necessary work at a reasonable cost.

Billing labor the way the client wanted in First Evangelical Covenant Church of Anchorage Alaska v. Michael L. Foster & Associates is likely too burdensome for most contractors and can even disincentivize efficiency on the job.

What can contractors do to prevent this kind of dispute altogether? One option is to include a clause in your construction contract or labor rate schedule specifying that labor rates are calculated based on employee skill and experience and may be billed for a range of tasks and work reasonably performed by the employee. This gives contractors the flexibility to bill employees out for a reasonable range of tasks, while putting clients on notice of what to expect.

And as always, timely and comprehensive invoicing is also king: a client may still quibble with how you bill employee time, but if your invoices have a transparent breakdown of costs and go out every month, you are better equipped to address billing disputes with your client as soon as they come up, and before they become a bigger-dollar problem.